O’Donoghue and Rabin (2015) on Present Bias

Ted O’Donoghue and Matthew Rabin, “Present Bias: Lessons Learned and To Be Learned.” American Economic Review 105(5): 273–279, 2015 [pdf].

• In extending the standard exponential discounting model to incorporate present bias, the β, δ functional form has proven to be “useful, tractable, and (importantly) disciplined [p. 273].” Further, the β, δ approach seems to correlate well with the psychological findings, in that most of the action in terms of changing discount rates over time concerns right now versus the future. [For more on the quasi-hyperbolic, β, δ approach, see this Behavioral Economics Outlines post.] 

• If β is less than 1, and hence the individual displays present bias, we still need to inquire as to whether the person comprehends that she is present biased. A person who fully understands her taste for instantaneous gratification is termed “sophisticated,” whereas someone who fails to understand her present bias – she repeatedly says, and believes, that she will quit smoking tomorrow – is said to be “naïve.” People who recognize that they are present biased but underestimate the extent of their bias are partially sophisticated or partially naïve. 

• Without uncertainty or liquidity constraints, choices among monetary streams should be made by maximizing present value at market interest rates: individual preferences and discount rates are irrelevant. In low-stakes experiments, people are unlikely to be liquidity constrained; therefore, those choices should not depend on discounting. For this reason, recent experiments exploring present bias try to use real effort flows, not monetary streams. 

• Pairs of decisions, such as those involving credit card borrowing along with those involving retirement savings, can inform the calibration of present bias. The idea is that credit card purchases are influenced by present bias, whereas retirement decisions reflect long-run (β=1) preferences. 

• Welfare assessments are possible despite the non-unitary (over time) actors that present bias reflects; long run (that is, β=1) preferences have much to recommend them as the welfare criterion [example here]. 

• Don’t rush to “explain” heterogeneous behavior by different degrees of present bias. Habit persistence or tastes for tobacco probably explain more variance in smoking than does different degrees of present bias, for instance.

Dickson, Jennings, and Koop (2016) on Domestic Violence and Glaswegian Football

Alex Dickson, Colin Jennings, and Gary Koop, “Domestic Violence and Football in Glasgow: Are Reference Points Relevant?” Oxford Bulletin of Economics and Statistics 78(1): 1-21, 2016 (pdf).

• Football matches can provide emotional cues that might spur domestic violence; in particular, an unexpected loss might lead to more violent incidents. Such was the finding from a 2011 article that examined some American football games, where betting odds provided the reference point for outcome expectations. 

• Dickson, Jennings, and Koop examine the Scottish Premiership (soccer), and domestic violence in the Glasgow area from January 2003 until October 2011. Two long-term and fierce rivals, Celtic and Rangers, are based in Glasgow. Together, they are referred to as the “Old Firm.” 

• Old Firm matches (that do not have extremely “unexpected” outcomes as the rivals are always competitive with each other) are associated with increased domestic violence (by some 36%); other Scottish Premiership matches, not so. (Another event that brings a significant increase in domestic violence is the Christmas/New Year’s holiday.) 

• Unexpected outcomes only are correlated with increased domestic violence for a restricted set of matches that are very important in terms of final league standings. That is, football-related loss aversion is not generally a big deal for Glaswegian domestic violence.

The Ellsberg Paradox and Ambiguity Aversion

• OK, this is not really an outline of an article, but at least there is an urn involved. The urn has a total of 90 balls inside of it. Thirty of the balls are black, and the other 60 balls are either red or blue. (That is, anywhere between 0 and 60 of those balls are red, and the remainder of the non-black, non-red balls are blue.) A single ball will be pulled at random from the urn. 

• Situation A: You can choose Bet 1A, which pays $100 if the ball that is chosen is black. Alternatively, you can choose Bet 2A, which pays $100 if the chosen ball is red. Which bet do you prefer? [Spoiler alert: most folks prefer Bet 1A.]

• Situation B: You can choose Bet 1B, which pays $100 if the ball that is chosen is either black or blue. Alternatively, you can choose Bet 2B, which pays $100 if the chosen ball is either red or blue. Which bet do you prefer? [Spoiler alert: most folks prefer Bet 2B.]

• The modal choices in these hypothetical urn-related decision problems, already spoiled for you, are to choose Bet 1A and Bet 2B. 

• These modal choices are inconsistent with expected utility maximization. A person who (strictly) prefers Bet 1A to Bet 2A, and is an expected utility maximizer, must believe that the probability of choosing a black ball (here, precisely one-third) exceeds the probability of choosing a red ball. A person who (strictly) prefers Bet 2B to Bet 2A, and is an EU maximizer, must believe that the probability of choosing a black ball is smaller than the probability of choosing a red ball (because the probability of winning via the blue ball is the same in either alternative, 2A or 2B).

• The disposition that (presumably) leads to these modal choices is termed ambiguity aversion. In Situation A, the subject knows precisely the probability of winning Bet 1A, but is unsure of the probability of winning Bet 2A. In Situation B, the situation is reversed, with Bet 2B being the option with the known probability (precisely 2/3) of winning.

• The modal choices, inconsistent with expected utility maximization, are an example of what has become known as the Ellsberg Paradox, after the analysis given by Daniel Ellsberg in "Risk, Ambiguity, and the Savage Axioms," Quarterly Journal of Economics 75(4): 643-669, 1961 [pdf here]; Ellsberg's version is on pages 654-655. The version in this post follows closely the presentation in the Introduction (pages 3-4) by Adam Oliver in Behavioural Public Policy, Adam Oliver, ed., Cambridge University Press, 2013.

Kocher, Lahno, and Trautmann (2015) on Ambiguity Aversion as Exceptional

Martin G. Kocher, Amrei Marie Lahno, and Stefan T. Trautmann, “Ambiguity Aversion is the Exception.” CESifo Working Paper No. 5261, March, 2015 [pdf available for download here].

[A later (and differently titled) version of this paper appears as Martin G. Kocher, Amrei Marie Lahno, and Stefan T. Trautmann, “Ambiguity Aversion is Not Universal,” European Economic Review 101: 268-283, January 2018.]

• In light of the Ellsberg paradox, many researchers believe that people are averse to ambiguity: people will accept known risks over ambiguous ones even when such choices are rather costly. 

• But ambiguity aversion has only been robustly demonstrated for choices involving uncertain gains, and where the probability of achieving a gain is moderate. What about quite unlikely risks, or prospects involving losses, or mixed (gains and losses) gambles? 

• Kocher et al. conduct a laboratory experiment with more than 500 participants. The main result is that for moderate likelihood gain prospects, ambiguity aversion exists (consistent with the prior literature). But outside of the moderate likelihood gain domain, aversion is harder to find, and even ambiguity seeking sometimes is common. Further, there’s a good deal of ambiguity neutrality in all conditions. 

• Previous work predicts: ambiguity aversion for moderately likely gains and for low likelihood losses; ambiguity seeking for low likelihood gains and moderately likely losses. Kocher et al. hypothesize ambiguity aversion for mixed gain/loss prospects. 

• In the first stage of the experiment, it is only in the moderate likelihood gain domain that ambiguity aversion (still, in a minority of participants) is indicated. Most people (in all domains) are ambiguity neutral. Once the effectively neutral folks are purged from the data set, what remains is the predicted pattern: ambiguity aversion in the gains domain for moderate likelihoods, and in the losses domain for low likelihoods; ambiguity seeking for low-likelihood gains and moderate likelihood losses. 

• For mixed gain/loss prospects, once again ambiguity neutrality dominates. When the neutrals are removed from the data set in this domain, the only statistically significant finding is ambiguity seeking for a .1 (average) chance to win 10 euro paired with a .9 (average) chance to lose 10 euro.

Bhargava and Loewenstein (2015) Want to Go Beyond Nudging

Saurabh Bhargava and George Loewenstein, “Behavioral Economics and Public Policy 102: Beyond Nudging.” American Economic Review 105(5): 396-401, 2015.

• The early behavioral economics-influenced policy proposals were aimed at internalities, and at nudging decisions quite proximate to the perceived problem. 

• The next stage, Bhargava and Loewenstein argue, should be to influence the design of policies that are more fundamental, but perhaps less proximate, to perceived problems. This approach need not be particularly controversial, given that the targeted problems often implicate externalities or other market failures. 

• Successful nudges have included easing the way to save more for retirement, along with improving the disclosure of information so that people receive useful information in a manner that is easy to understand and respond to. 

• Proposed principle #1: not only should choice environments be simplified, the objects of choice should be simplified. Financial products, for instance, could be required to be simple and to be presented in a standardized form. 

• Proposed principle #2: policy should look to counter nudges by the private sector that are detrimental to consumers. 

• Proposed principle # 3: traditional policy instruments, such as taxes, should be modified in a manner informed by behavioral considerations (framing, salience, inattention, etc.) to maximize the policies’ impacts. 

• Examples that the authors discuss include health insurance (lots of room for simplification and standardization); privacy and disclosure (again, simplification and standardization, along with controls on misleading disclosures); and climate change (contending against the many psychological dispositions that make it hard to recognize or respond to this global public bad).

Bryan, Adams, and Monin (2012), on Cheating and Cheaters

Christopher J. Bryan, Gabrielle S. Adams, and Benoît Monin, “When Cheating Would Make You a Cheater: Implicating the Self Prevents Unethical Behavior.” Journal of Experimental Psychology: General 142(4): 1001-1005, 2013 [pdf].

• People who engage in unethical behavior like to weaken the connection between their behavior and their identity. They might cheat, but they don’t want to be a cheater. Similar distinctions might surface with litter/litterbug, vote/voter, or drunk driving/drunk driver. 

• The authors run an experiment that involves a frame of “cheat” versus a frame of “cheater.” Many more people (apparently) cheated when the frame was about cheating, than when the frame was about cheaters. A follow-up, internet-based experiment had similar results. 

• The results do not imply that we should always try to adopt the “identity” (cheater) framework, even if that frame does diminish the number of people cheating. Maybe if you cheat despite being told not to be a cheater, your cheating will be even worse!

Engel and Kurschilgen (2014) on Introspection

Christoph Engel and Michael Kurschilgen, “The Jurisdiction of the Man Within – Introspection, Identity, and Cooperation in a Public Good Experiment.” Max Planck Institute for Research on Collective Goods, 2015/1, December 2014 [pdf].

• This paper features a lab experiment involving a repeated public good game, where groups of four players individually decide each round how much of their endowment they will invest in a public good. The choices of every player in every previous round are known to everyone. In such games, contributions tend to fall over time, and a significant minority of people never contribute. The modal behavior is “conditional cooperator,” where people contribute something as long as others do.

• Each round features a second stage as well, where the players are asked about their expectations or beliefs. The various “treatments” in the game differ based on the question that is posed. 

• “Introspection” for the authors involves a comparison of your own behavior with a normative goal. The authors contend that introspection can be induced in the players via the right sort of belief question. 

• One question aims at making salient the “normative ideal,” asking players what they think everyone should contribute. A second treatment attempts to direct focus to the “normative minimum,” where players are asked what is the least amount that players should be expected to contribute. 

• The authors suggest that players will have an element of their utility connected to their “identity.” This term lowers a player's utility to the extent that the player's actual behavior falls short of her ideal. But the extent of such potential lowering depends on how clear it is that the player has not lived up to her professed ideal. 

• Any sort of introspection might increase the mental clarity concerning how a player's behavior falls short of her own ideal. But the Normative Minimum question will, the authors hypothesize, go the furthest in reducing her “moral wiggle room.” Any contribution that does not at least match what she think is minimally required will be a stark piece of hypocrisy. 

• Sure enough, the “normative minimum” question leads to substantially more cooperation, and furthermore, greatly slows down the erosion of cooperation over time.